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Dynamic Moral Hazard, Learning and Belief Manipulation

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  • Bhaskar, Venkataraman

Abstract

We study dynamic moral hazard, with symmetric ex ante uncertainty and learning. Unlike Holmstrom's career concerns model, uncertainty pertains to the difficulty of the job rather than the general talent of the agent, so that contracts are required to provide incentives. Since effort is privately chosen, the agent can always cause a misalignment of beliefs between the principal and himself, by shirking. We show that such a misalignment is always profitable for the agent, and must be dissuaded by providing more high powered incentives. However, high powered incentives in the future only aggravate the incentive problem today, so that the problem is compounded as the interaction becomes longer. We also study the benefits of long term contracts with full commitment, and the role of random effort choice.

Suggested Citation

  • Bhaskar, Venkataraman, 2012. "Dynamic Moral Hazard, Learning and Belief Manipulation," CEPR Discussion Papers 8948, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8948
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    References listed on IDEAS

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    Cited by:

    1. Bhattacharjee, Swagata, 2022. "Dynamic contracting for innovation under ambiguity," Games and Economic Behavior, Elsevier, vol. 132(C), pages 534-552.
    2. Terstiege, Stefan, 2014. "Private versus verifiable interim performance evaluations under uncertainty," Economics Letters, Elsevier, vol. 123(3), pages 341-344.
    3. Klein, Nicolas, 2016. "The importance of being honest," Theoretical Economics, Econometric Society, vol. 11(3), September.
    4. Swagata Bhattacharjee, 2019. "Dynamic Contracting for Innovation Under Ambiguity," Working Papers 1022, Ashoka University, Department of Economics, revised Aug 2019.
    5. Weng, Xi, 2015. "Dynamic pricing in the presence of individual learning," Journal of Economic Theory, Elsevier, vol. 155(C), pages 262-299.

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    More about this item

    Keywords

    Learning; Moral hazard;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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